Australian investors are increasingly backing ‘impact’ startups, report finds

The social and environmental impact of a business is becoming more of a contributing factor in the decisions of investors, as they shift in line with consumer — and employee — demand.

That’s according to the Giant Leap Ventures’ Impact Startup Benchmark Report 2021, which has analysed investments made into Australian startups over the past five years.

Giant Leap remains Australia’s first and only VC firm dedicated solely to impact startups, but managing partner Will Richardson says it’s a trend that’s only on the up.

According to the report, between 2015 and 2020, about 20% off all locally funded startups would be considered ‘impact’ businesses according to Giant Leap’s criteria.

In 2015, of all venture deals, about 15% were backing impact startups. Now, that figure has increased to 23%.

About half (46%) of the impact startups that secured backing over the past five years are focused on sustainability and the environment. There’s particular weighting towards the energy, food and waste sectors.

According to a report in The Australian today, environmental social and governance (ESG) is also becoming more important in corporate funding and mergers and acquisitions.

Nicole Beavan, a Goldman Sachs executive director in investment banking, said companies are under more pressure to make net-zero emissions targets.

“ESG is becoming a core part of the strategic fit,” she said.

Speaking to SmartCompany, Richardson suggests the results of the Giant Leap report reflect a shift in consumer demand, as people are looking to “align their purchasing behaviour with their values”. Equally, talented individuals want to work at businesses that create purpose.

But Richardson also notes the sheer scale of the challenges facing the world, whether it’s the climate crisis, inequality or the global pandemic. These are huge problems that businesses can work towards creating solutions for, he says, and “as the sentiment changes, investors are taking notice”.

Therefore, the fact investment in impact businesses is increasing “makes a lot of sense”. But he didn’t necessarily anticipate the figure already being as high as 20%.

“We always expected the market to grow, and we expect it to grow further,” he explains.

“But we’re pleasantly surprised that our impact thesis is coming to bear.”

Signs of growth

The results also point towards a maturing of the Aussie ecosystem.

The impact ecosystem here is still probably about a decade behind the US and Europe, Richardson estimates.

In the US, for example, he says US$600 million of fresh funding has been raised by US impact funds — including new and existing impact VC firms, and mainstream VC firms launching impact-specific funds — all in the first few months of 2021.

The Australian ecosystem is following the same path, with venture funds such as Grok Ventures and Skip Capital considering social and environmental impact in investment decisions.

The report also outlines a lot of movement in terms of family offices focusing partly or entirely on impact investments, but notes the impact investing landscape remains in its infancy here.

Giant Leap is planning to release its Impact Startup Benchmark report every two years, and Richardson expects to see continued growth in the proportion of impact startups securing funding. He also expects to see more impact VC firms like Giant Leap emerge.

However, Richardson’s also wary of ‘impact washing’ — that is, companies and funds making grand claims about their environmental or social impact, without actually demonstrating any measurable change.